Next year’s mock and we’ll know.
Its all good papasita… As Bleeck said, I guess we’ll never know till next yr, if at all.
Dude as stated above, even if it was their option and not forced on them, an option is never excercised unless it is beneficial to do so. Originally the NPV was deemed positive. Since they are now choosing to excercise the option, for it to be beneficial to delay would mean they are are uncertain that the current investment is positive so the NPV outlook has clearly changed to either negative, or uncertain, in which case the value of the option must now be considered. Read above, I went over it in very clear depth. It is conclusive and indisputable, I hate when people just post and do not read what i wrote earlier in such a pain in the @ss exhaustive thread.
“It is conclusive and indisputable” Bull Sh!t. Without the actual text we have no way of know who has remembered the details correctly (and in this case, the details seem to be argued considerably and are very important in answering the question). You may “think” you remember it correctly and made the correct judgement, but don’t flatter yourself by claiming, “It is conclusive and indisputable”.
I’m not flattering myself Spongie, in this case I’m not arguing details, my case on this stands whether or not the delay was either forced or decided upon, as long as a delay occured, the NPV can clearly no longer be considered a definite positive and thus we must consider the impact of the option. Case closed, no flattery here, read my above case on page 4. No way you can dispute it.
damnit!!! i knew i shouldn’t have opened this post… there should be a mandatory “*spoiler alert*” on all posts pertaining to questions that were on the exam… i don’t want to see them!!! ahhhh…
I believe the option value should be “considered” no matter what. Even of there is already a positive NPV, the option adds value to the project and could impact its ranking. Even if this is the only project, the fact that it changes the value even if it only makes it more positive means you must consider it as the old value is now innacurate, end of story. I believe I even remember a question creating NPV with real option impacts in the cfai texts. So I believe it is definitely no/yes. ------------------------------------------------------------------------------------------------------------- Also, this just came to me while I was walking around trying to find wifi, but I believe they said they were delaying so they could do study’s on the marketability or demand as they felt the demand may have changed or something along those lines. If that is the case, then the the old positive NPV figures may not be relevant as the increased certainty may lower npv based upon either altered cash flows, or an increased discount rate. Either way, the simple fact that they are choosing to excercise the real option to delay tells you that circumstances have not been as favorable as initially hoped, possibly leaving them with a negative npv. Think of it this way, if the management believed the npv was positive it would not have made economic sense to exercise an option to delay as you lose TVM by delaying the cash flows. Since the real option to delay was excercised, this tells us that management believed NPV was either negative or too uncertain to be determined. -------------------------------------------------------------------------------------------------------------- Spongebob, These were the two prior responses I was referring to, noone has attempted to challenge them yet, so until you do, I’m considering it conclusive and indisputable. To be honest, what has me annoyed is that noone has addressed these responses and yet they keep claiming to dispute it, if you want to disagree, fine, but if you are, please challenge this as opposed to ignoring perfectly valid points.
The second one, especially from the middle down is my key area of concern that I would like to see addressed, refuted.
Yes, all your points are conclusive and indisputable. I’ve just placed a call to CFAI and they’re going to waive your requirement to take LIII and proceed directly to the charter.
Look, I flubbed the 250K NPV q, and I admitted that, along with about every other easy one, but htis is a pretty straight forward q and yet you still can’t pretend to contest the 2nd point listed above. I said moreso than anyone I probably failed, but I know the answer to this one damn question, and since you and noone else will address it you might as well admit it, Jesus. It drives me insane how you can sit their and make snide remarks and say its wrong like some of the others and yet not even address the answer I gave because you know you can’t. How small minded is that, what is driving me insane here is that I have no problem with being wrong, but noone will step up to the plate and refute my point, and now as a result, this thread is now 5 pages long and going nowhere. I came back against other people’s points with real academic counterpoints, but noone here is showing me the same simple flipping courtesy.
Black Swan, The problem is not the points you make but the minimal courtesy you mete out to others in this particular post. Disagreeing agreeably is the relevant point here. You have based your answer on the assumption of what you remember the question asked and many ppl here are still not sure of what the exact wording was and if it was different than the assumption you make, it could yield a different “correct” answer. With the wordings you remember, you might be right but not everyone might be necessarily interested in only your version and you need to identify, acknowledge and respect that because AF is not your own private forum.
I know, my bad, I got excited, its actually been building in this specific post because I have been getting more and more agitable at being ignored, to be honest, I think I’m just bothered that this thread keeps coming up and I need to learn to leave it be instead of feeling obligated to chime in. I kept getting annoyed that people were ignoring my post despite my directing them to it, and overreacted. My apologies. Although and I will not revisit it after this, you can do what you will with it, but the scenarios I laid out before cover every possible aspect of the wording. I honestly feel that there is no longer room for wording issues of any kind. We all agree on the fact that the project was now going to be delayed. The issue was over whether it was forced or by choice. Either way, as I pointed out, excerising the option indicates a negative or uncertain present value just prior to excercising the option, as you would otherwise not delay due to decreased TVM. If it was forced, then your NPV may not be positive any more. Either way this leaves you in a situation in which you must now consider the impact of the real option on the NPV.
Just to clarify, though, sorry spongie, I do feel bad about that.
oooooh i told myself i wouldn’t cry… : * (
I know this has been discussed a lot but I think there are few points we need to keep in mind: 1. They estimated some cash flows without option and got the project NPV as positive. We can assume that the future cash flows estimated are based on some demand expectation which will incorporate the acceptance of their product in the market. Regarding the uncertainty of these cash flows its already incorporated into the riskiness of the project. 2. If we consider delaying the investment of project as an real option then in that case they can straight away take the project. This is because whatever be the case real option adds value to the project. 3. Now if we consider Capital budgeting analysis as allocation of resource to profitable projects and not calculation of exact NPV number then the delaying option will have no impact on the analysis. 4. As far as the prototype cost is concerned its actually the option cost but I think i shouldn’t be considered as the investment in prototype has already been done.
you have to take account the value of the option… like any other option…it should have a value…
Black Swan Wrote: ------------------------------------------------------- > papasita what your missing is that at t0 the r&d > should be valued, but at tX it is now sunk cost > and is not considered hence net PRESENT value. N/Y kabhii Wrote: ------------------------------------------------------- > 4. As far as the prototype cost is concerned its > actually the option cost but I think i shouldn’t > be considered as the investment in prototype has > already been done. CFAI books: page 56:Fundamental Options…“Many R&D projects also look like options” What do you guys think?
golfer Wrote: ------------------------------------------------------- > you have to take account the value of the > option… > > > like any other option…it should have a > value… Agreed but real option has a positive value, so if you define capital budgeting analysis as to calculate the correct NPV then you need to calculate option value. If you define capital budgeting allocating resource to positive NPV projects, then no need to calculate real option value.
kabhii, I don’t remember the vignette said that there was already positive NPV, there was uncertainty and that’s why they wanted to test the prototype, therefore the delay=>timing,expansion or abandonment options. In any case, there was nothing about “capital budgeting allocating resource”. You are making it too complex for 5 pages of CFAI readings
papasita Wrote: ------------------------------------------------------- > kabhii, > I don’t remember the vignette said that there was > already positive NPV, I do remember for sure that the product already had positive NPV, infact the number was already mentioned in the vignette. > there was uncertainty and > that’s why they wanted to test the prototype, > therefore the delay=>timing,expansion or > abandonment options. Uncertainty about cash flows being realised is related to the riskiness of the project which is incorporated into the cost of capital as well as in the expected cash flows. > In any case, there was nothing about “capital > budgeting allocating resource”. You are making it > too complex for 5 pages of CFAI readings Valuing a project without real options underestimates the NPV. In this case NPV is positive so the project can be accepted without evaluating the real option. Now it depends on what CFAI means by capital budgeting analysis? If it means NPV should be calculated correctly then we need calculate the option value. If it means taking a yes / no decision for the project then there is no need to value the option.